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This week, federal district court judge Amit Mehta delivered a landmark decision finding that Google holds an illegal monopoly over the search market, in violation of the Sherman Act. It’s a massive victory for the Department of Justice’s multiyear legal battle in the first major monopolization trial in over 25 years. More broadly, the decision affirms that the movement to rein in corporate concentration in the tech sector and across the economy has legs to stand on in court.
Judge Mehta effectively deemed Google’s illegal monopoly to be a function of an exclusive anti-competitive arrangement with Apple and other browser and mobile device companies, exchanging search engine default status for a mountain of money in revenue sharing ($26.3 billion in 2021). In so doing, Mehta tore up the secret master contract that had been choking the internet for decades, stifling commercial innovation and enshittifying the consumer experience.
Based on this ruling, the DOJ and the judge have an opportunity to write a new charter for the future of the internet, at a time when it’s reaching an inflection point with artificial intelligence.
Winning this case is only the first front in the battle, however. Google has already appealed the decision. If it is upheld, it will enter the remedy stage where there are a range of potential outcomes: some good, some bad. And a change in power in the executive branch will take place well before we get a final decision.
In many ways, we’re right back to where we were during the last major monopolization case against Microsoft in the late 1990s. From the time Microsoft first lost in 2000 to when it struck a settlement in 2001, legal challenges, tech lobbying, and the turnover of presidential administrations into more tech-friendly hands all watered down the ultimate result, despite a historic defeat. Even greater challenges are facing regulators this time around with Google.
GOOGLE, A COMPANY WITH A $2 TRILLION market capitalization, in many ways was a paradigmatic first case for the new crop of antitrust enforcers because everyone intuitively knows it’s a monopoly. In a technical sense, the firm has a dominant market share: nearly 90 percent in search on desktop computers, and 95 percent on mobile. This squares with the company’s ubiquity, even monopolizing the very term “to google.”
The question was whether the government could adequately prove in court that it had acquired that power not by being the best, but by using its position to thwart competition. The other challenge is that Google’s search engine is available for free. For the past 40 years, antitrust fights had for the most part taken place on the Chicago school’s terrain, narrowly focused on consumer prices. Antitrust skeptics claimed for years that the government did not have a case against Google for exactly this reason. They even talked the Federal Trade Commission out of suing Google in 2012.
The Justice Department was able to win the lawsuit by beating Chicago school proponents at their own game, while also returning the battle to the original intention of the Sherman Act, which is focused on competition. They diminished the consumer welfare standard back to being just a made-up principle, conjured up by economists in the 1970s, that began to hold sway in court.
The Justice Department and the judge have an opportunity to write a new charter for the future of the internet, at a time when it’s reaching an inflection point with AI.
For instance, as part of the Google ruling, Judge Mehta agreed with the government that Google did hold the power to raise prices on advertisers bidding for text ads on search pages. Documents in court showed that Google engineered an intricate system of pricing knobs that they could turn up whenever they needed to meet quarterly earnings targets, sometimes as high as a 20 percent increase. It was also revealed that Google tested degrading its own search and found that to have a trifling impact on revenue.
But the central part of the ruling was that Google had purchased default placement across most major devices and browsers, the key one being with Apple, making it the gateway distribution channel for all traffic on the internet.
That status was not so much earned as it was bribed. Google’s default position, which it maintained through contract for over 20 years, cut off any avenues for competitors to get a foothold in a search market with huge barriers to entry. Mehta estimated that 50 percent of all general search queries in the U.S. are asked through a “search access point” where Google has purchased the default, and another 20 percent were asked on Chrome, Google’s browser, which has Google’s search engine as the default as well.
Judge Mehta in particular was clearly convinced by testimony from behavioral economist Antonio Rangel showing that users are much more likely to just stick with a default option because of various switching costs, and that Google was well aware of this pattern. That’s why it prioritized “the power of the default” in its early business stages and dealings with Apple.
As revealed in court, Google shared $20 billion in 2022 for the default position on computers and iPhones. Over the years, when Apple has considered developing its own search engine function or opening up the default to competition, Google threatened its partner, indicating those decisions would violate their agreement and lose Apple huge revenues.
Apple, which at one point actually hired Google’s head of search, estimated tens of billions in up-front costs to establish a search engine and $6 billion a year to maintain it, not including what it would cost to monetize it. When Apple entered into talks with Microsoft’s Bing search engine over it signing a default contract, Bing offered 100 percent of its revenue in the deal and it still wasn’t enough to persuade Apple to make the switch.
“There is no genuine ‘competition for the contract,’” Judge Mehta wrote. “Google has no true competitor.” Though there are a couple of nominal competitors, he added, “market realities matter more than what is theoretically possible.”
The default status delivered Google superior traffic numbers and thus massive troves of data to achieve a scale advantage over rivals, ultimately refining its search quality. This was a key point of Judge Mehta’s case; Google has no competition because other browsers cannot attract the same level of data due to the default advantage. Google is superior, in other words, because it entrenched itself as a monopoly.
DESPITE THE TECH LOBBY’S SPIN that this loss for Google will merely help Microsoft in the search market, the ruling could in fact put numerous generative AI companies, which are seeking their own type of exclusive arrangements with the dominant tech hardware manufacturers, in jeopardy. Earlier this spring, Apple was in talks with Google to implement Google Bard into its suite of services, but then decided to strike a partnership with OpenAI, which Microsoft is a major stakeholder in. This deal delivers OpenAI access to Apple’s customers, allowing its new ChatGPT version to train its large language model on customers' data.
As former White House competition czar Tim Wu argued in The New York Times, the Google remedy could play a huge role in shaping the developing AI market, which holds potential to change the way people search for information online and usher in a new generation of tech innovators. But the dominant firms want to leverage their existing power over the techstack with data, crawling, and scraping practices to advantage their AI versions over new rivals springing up.
Striking down restrictive default arrangements has wide-reaching implications for industries beyond tech. The default contracts are essentially shelf-space arrangements, pay-for-access deals that we see across the economy, most prominently in the grocery industry. There, food companies pay grocers for the most attractive positions on a shelf. If those arrangements combine with market power, either for the grocery firm or the food company, that could be at risk.
In the Google case, it’s completely at the discretion of regulators to craft a remedy that corrects future market conditions to foster competition, rather than merely rectifying past illegal conduct. That’s the viewpoint at least of Jay Himes, the lawyer at DOJ who worked on devising the remedy in the Microsoft case, and who was recently brought back into the Federal Trade Commission to serve as an administrative law judge.
The Google remedy could play a huge role in shaping the developing AI market, which holds potential to change the way people search for information online.
At Y Combinator’s RemedyFest earlier this year, a conference dedicated to discussing potential outcomes of the Google case, Himes said that enforcers “can also adopt remedies that may be necessary to preserve competition overall.” He also raised some skepticism about behavioral remedies, which tend to be weaker.
Behavioral remedies in antitrust usually entail consent decrees where companies pledge to abide by certain guidelines against anti-competitive conduct. They’ve fallen out of favor with the new school of antitrust enforcement because of many cases where they clearly didn’t work out, such as the Live Nation merger with Ticketmaster. Large tech companies would be an even bigger enforcement challenge for behavioral remedies, Himes argued, because of the sheer size and data flows.
Structural remedies, by contrast, separate out distinct lines of business usually through divestitures. A structural remedy was initially proposed to break up Microsoft’s monopoly in the 1990s, but ultimately it was turned into a behavioral remedy with a consent decree in the 2001 settlement during the Bush administration. That said, it still was effective in some ways, by forcing Microsoft to share access to software interfaces to outside third parties. Google and other tech companies likely would not have been as successful as they are today without the Microsoft case.
With the Google case, one weaker solution to resolve the default dilemma would be with mandated choice screens for browsers. Critics of choice screens say they would be ineffective to correct the damage Google already has inflicted on competitors, because it already has built such a renowned brand image and a more refined product with ill-gotten data. That view is supported by Mehta’s ruling, in particular his arguments about how search data directly improves quality.
A more ambitious remedy would separate out Google’s search engine from the Chrome browser or the Android operating system for mobile phones. Or the judge could force Google to share its datasets with outside parties. In that instance, Google would follow certain public-utility obligations.
BUT JUST TO GET TO THAT REMEDY STAGE, regulators will have to wade through a fraught period of legal challenges and a new administration.
With its many tentacles in power centers in Washington, Google still has plenty of tools at its disposal to try to undermine the case and save its own skin.
The main lesson that Silicon Valley took away from the Microsoft case was that Bill Gates didn’t treat the threat of government action seriously, and thus had an ill-equipped ragtag lobbying operation. Google decided it would not make the same mistake and built up one of the most robust influence-peddling operations in the District, as documented in the recent book The Wolves of K Street. High-powered lobbyists like Tony Podesta and others came up with a new playbook to brush back regulatory oversight by paying outside researchers to launder industry talking points through the guise of neutral “expertise.” In particular, Google’s team deployed this to help tamp down an FTC investigation during the Obama administration. From Google’s early days, Eric Schmidt and Adam Kovacevich, a former Google executive now at a Google-funded organization called the Chamber of Progress, were tasked to develop this machine in Washington in the hopes of preemptively averting a case like the one they’re facing now.
Though Microsoft had a limited team, their Washington allies did try to slash the DOJ Antitrust Division’s appropriated funding in 2000 by $10 million. The goal was to leave the division incapable of administering the extensive research required for remedy negotiations.
Similar efforts have already been under way this congressional session to slash DOJ funding, and Google will likely continue to attempt to wage war on the department through Congress.
Just like with Microsoft in 2000, Google is also eyeing a turnover in presidential administration, regardless of which party takes power, to lobby for more business-friendly DOJ appointments. The Trump Antitrust Division was more interested in managing personal vendettas for the former president, and Trump was just recently bought off by tech interests when he reversed himself on a forced divestiture of TikTok after an investor in the Chinese parent company, Jeff Yass, decided to support his campaign. That suggests that a second Trump administration would be easy prey for Google.
There’s been scrutiny of the Harris team on tech as well, given her close relationship with Silicon Valley over her career. Harris donors such as Reid Hoffman have called for the ousting of FTC chair Lina Khan and the rollback of antitrust enforcement, to which Harris’s team has only demurred, saying “we haven’t had any discussions.”
When asked directly on CNBC about Hoffman’s comments about Khan and “whether we will hear about a shift in her [Harris’s] regulatory views?” a close ally of Harris, Maryland Gov. Wes Moore, responded, “I think we will and I think we have to.”
CNBC has been busy. On another segment this week, Roger Altman of the Wall Street investment bank Evercore agreed that Khan had to go and was too “extreme.” However, he castigated the strategy of Hoffman and the “Silicon Valley types who are clamoring publicly for Lina Khan’s head,” because doing so out in the open allows progressives to fight back against it. A Wall Street veteran knows the more shrewd path is to use leverage behind the scenes and in the shadows.
Altman’s comments might be prescient. Hoffman’s overeagerness could very well have tanked Google’s best path to tie up the court case.
